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CENTRAL BANK of ESWATINI | FINANCIAL STABILITY REPORT Issue No CENTRAL BANK OF SWAZILAND FINANCIAL STABILITY REPORT Issue No. 1 CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 OF ESWATINI Umntsholi Wemaswati JUNE 2019 Issue No.3 © 2019 Central Bank Of Eswatini a CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 b © 2019 Central Bank Of Eswatini CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 CENTRAL BANK OF ESWATINI FINANCIAL STABILITY REPORT June 2019 Issue No. 3 © 2019 Central Bank Of Eswatini i CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 FOREWORD about pertinent issues and assessments pertaining identified vulnerabilities to the financial system. Recognizing the interlinkages between the macro economy and financial system, the FSR 2019 discusses macro risks and vulnerabilities observed in 2018. Financial stability assessment for this issue revealed that the financial system of Eswatini remained stable, despite emerging risks from domestic and international economic developments over 2018. Risks from the external environment, particularly from sudden tightening of monetary conditions, alleviated on the back of weak economic growth in the developed economies. Challenges from the domestic and external environment remained elevated but somewhat stable. From the domestic front, fiscal challenges and weak economic growth were vulnerable Majozi V. Sithole points for financial stability. Looking ahead, Governor risks stemming from the domestic economy Chairman - Financial Stability Committee are expected to ease driven by improved economic performance. Purpose of the Financial Stability Report Assessment of the banking sector resilience The mission of the Central Bank of Eswatini (CBE) is to through stress tests reflects a strong foster a stable financial sector conducive to economic banking sector amidst the challenging growth. In accordance with the Constitution of the economic environment. The CBE remains Kingdom of Eswatini Act 2005, specifically sections committed to ensuring that the regulatory 206 (2) (d) and (f), the CBE shall supervise the environment remains conducive for new operations of financial institutions in the Kingdom, and safe innovations in the financial sector. as well as promote monetary stability, a sound and The CBE therefore will continue assessing stable financial structure in the Kingdom of Eswatini. financial sector developments to protect Continuous assessment of domestic and foreign and enhance financial sector resilience economic developments is an important aspect of thereby maintaining financial stability. the CBE’s commitment to ensure that emerging vulnerabilities are identified early to mitigate risks. The CBE appreciates that greater public The publication of the Financial Stability Report (FSR) awareness of financial system vulnerabilities provides a platform to communicate with stakeholders in itself may serve to encourage financial ii © 2019 Central Bank Of Eswatini CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 institutions to curb activities that might environment and the internal and external exacerbate systemic risks and help to promote value of the currency. One way of defining policy reforms to strengthen the resilience of financial stability is in terms of the absence the financial sector. This awareness serves as of systemic risk. Systemic risk is the risk that a motivation to the CBE that issues of financial the default of one institution in the system can stability are priority to all citizens of the lead to the default of one or more otherwise Kingdom of Eswatini. sound institutions, thereby threatening the markets and the economy as a whole. Another Defining “financial stability” informal definition of financial stability may be in terms of what is necessary to achieve it, for Financial stability is not a sufficient but a example, the sound regulatory environment, necessary precondition for sustainable economic effective macro-prudential surveillance and growth. There is no general global consensus on public confidence in the system. the definition for financial stability, but there is general consensus that financial stability is an The Central Bank of Eswatini defines financial important precondition for economic growth, stability as a “condition in which the financial development and employment. system- comprising of financial intermediaries, markets and market infrastructures- is capable Financial stability is more difficult to define of withstanding internal and external shocks than price stability, which simply relates to such that participants have confidence in the among other indicators, a stable inflation system’’. © 2019 Central Bank Of Eswatini iii CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 CONTENTS 1. ESWATINI FINANCIAL SYSTEM AND COBWEB ............................................................ 1 1.1 External Environment ................................................................................. 1 1.2 Domestic Environment ................................................................................ 2 1.3 Household Sector ...................................................................................... 2 1.4 Corporate Sector ....................................................................................... 2 1.5 Banking Sector ......................................................................................... 2 1.6 Non-bank Financial Sector ........................................................................... 2 1.7 Payments Systems Stability .......................................................................... 3 1.8 Heat Map ................................................................................................ 4 2. EXTERNAL ECONOMIC DEVELOPMENTS .................................................................. 5 2.1 Global and Regional Economic Developments ..................................................... 5 2.2 Global Financial Stability Developments ........................................................... 6 2.3 South Africa ............................................................................................. 7 2.3.1 Economic Developments ..................................................................... 7 2.3.2 Financial Stability ............................................................................. 7 3. DOMESTIC ECONOMY ........................................................................................ 9 3.1 Economic Growth ...................................................................................... 9 3.2 Inflation and interest rates ........................................................................... 10 3.3 Fiscal Position .......................................................................................... 12 3.4 Government Debt ...................................................................................... 13 3.5 Gross official Reserves ................................................................................ 15 3.6 Household Sector ...................................................................................... 16 3.7 Corporate Sector ....................................................................................... 18 3.7.1 Large Corporates .............................................................................. 19 3.7.2 Micro, Small and Medium Enterprises ...................................................... 20 3.7.3 Corporate Debt ................................................................................ 20 3.7.4 Risks to Corporate Debt ...................................................................... 22 3.7.5 Profitability ..................................................................................... 23 3.7.6 Risks to Corporate Sector Profitability ..................................................... 23 4. DEVELOPMENTS AND RISK ANALYSIS OF THE BANKING SYSTEM .................................... 25 4.1 Growth of the Banking Sector ....................................................................... 25 4.2 Capital Adequacy ...................................................................................... 26 4.3 Earnings and Profitability ............................................................................. 26 4.4 Credit Risk .............................................................................................. 27 4.5 Banks’ Asset Quality ................................................................................... 27 4.6 Credit and Funding Concentration .................................................................. 29 4.7 Banks’ Funding Structure ............................................................................. 30 4.8 Liquidity Risk ........................................................................................... 31 5. STRESS-TESTING OF THE ESWATINI BANKING SECTOR ................................................ 32 5.1 Credit Risk .............................................................................................. 32 5.2 Default by the Largest Borrowers ................................................................... 33 5.3 Liquidity Risk ........................................................................................... 33 5.4 Simulated Bank Run ................................................................................... 33 iv © 2019 Central Bank Of Eswatini CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 5.5 Sudden Withdrawal by the Largest Depositor
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